Monday, May 04, 2009

Here's an update to an important chart showing the contributions to the percent change in first quarter GDP in a historical context. The great American consumption machine certainly pulled up from its nosedive of late last year as indicated in the blue bars below.The late-2008 plunge in consumer spending was the second worst six-month period since World War II, the back-to-back contributions of -2.75 and -2.99 percentage points second only to the first half of 1980 where readings of -0.45 and -5.56 were seen.

Interestingly, in 1980, the subsequent quarters saw a huge rebound in consumption. The percentage contributions in subsequent quarters were 2.72 and 3.44, as compared to the bounce in the just concluded quarter to just 1.5 percentage points.

Obviously, the second quarter reading for consumer spending will be greatly anticipated.

But, it's those red bars above - business investment - that are even more interesting.

The first quarter contribution of -8.83 percentage points, a figure that necessitated a huge increase in scale to the charts above and below, was the worst reading since -9.05 in the first quarter of 1951, which was only slightly "less bad" than exactly two years before at -10.72.

But, it was the decrease in inventories that had everyone excited last week. That big violet bar hanging below the x-axis in the chart below was big enough that many analysts thought it would require the ramping up of production in the period ahead.That violet bar is quite large and it may cause production to increase if consumption continues to rebound, but, here's another interesting statistic - if you strip out the inventory component, the -6.04 percentage point contribution was still the second worst quarter for business investment since World War II, again, trailing only the early 1980 period at -6.34.

After these two quarters, the next worst reading for business investment ex-inventory change was just -3.82 back in the first quarter of 1949, so, these two - Q2-1980 and Q1-2009 - are real outliers in the data set.

What makes this all the more fascinating is that early 1980 was the period following Fed Chairman Paul Volcker's one-man battle against inflation. From the time he took office in August of 1979, the Fed funds rates was pushed up from just over 10 percent to 18 percent in April of 1980.

No wonder there was a recession.

In contrast, in the year leading up to the most recent contraction in GDP that looks so similar to the 1980 downturn, short-term rates moved from just over five percent to zero.

There are a great number of similarities in the economic data between 1980 and today, but the conditions are very different.